CEOs Need to See Through Walls

The key to reforming capitalism lies in creating shared value by harnessing the power of business to solve social problems. Paradoxically, in these difficult economic times, the business opportunities hidden in our urgent social problems offer the greatest potential for profit and growth most businesses will ever face. But there is a trick to discovering these opportunities: It takes a CEO who can see through walls to find them.

Every business operates within a set of constraints that effectively wall off opportunities. Its products and services were designed for a specific market, closing off other markets with different needs. Its supplies are procured from the cheapest global bidder, just as its competitors are. Manufacturing and logistics follow established conventions. The prices of natural resources and commodity crops fluctuate subject to external conditions that the company doesn’t control. The availability of skilled employees depends on an educational system independent of the company. All these limitations are taken as given — outside the walls of the company’s core business strategy — walls that most CEOs cannot see through.

In a time of recession, these walls close in ever more tightly. The constant pressure to meet short-term profit projections forces companies to cut costs and lay off employees. Narrowed profit margins cannot tolerate taking on new risks. The walls become even more imposing, shrinking the opportunities for profit and growth.

Model CEOs

Some CEOs see through these walls, transcending the limitations that box their companies in and finding opportunities other miss:

Medtronic is expanding into a new suite of products to serve middle-income markets in India that could never afford its current line of medical devices. To do so, the CEO had to look outside the company’s traditional business model, investing in the R&D to develop new devices with different pricing and distribution systems.

Verizon’s CEO plans to drive profit growth by moving beyond connectivity and tapping into the immense savings its customers can achieve from web-based software programs that regulate energy use and transmit health data. This move meant entering into new partnerships with utilities and health care companies.

Novartis has penetrated a new market of 42 million people in rural India, but to do so it had to hire hundreds of local healthcare workers and build a distribution system to supply 50,000 small remote clinics.

Mars launched a major effort to increase the yields of more than half-a-million low-income cocoa farmers in Cote D’Ivoire, working with the government and nonprofit organizations to fundamentally change local agricultural practices. Doing so meant working with competing chocolate companies to coordinate their efforts.

Cisco created the global Networking Academy and trained over four million network administrators, single-handedly combatting the global shortage of IT workers that had threatened to limit its growth.

ArcelorMittal is paying high school students to attend college and take specific courses relevant to the company’s needs with the promise of a job when they finish — positioning itself to have the skilled employees it needs when the economy strengthens.

Focus on Social Issues Underlying the Business

What was it that enabled these CEOs to see through the walls that stopped their competitors short? In each case, the CEO saw beyond conventional limitations by embracing a new dimension of business strategy — the opportunity to create shared value by focusing on the social issues underlying the businesses.

Medtronic and Novartis were driven by the challenge to save more lives. Verizon focused on the biggest social issues that its technology could affect. Mars was concerned about the sustainability of cocoa farming. Wal-Mart discovered massive savings through its program to reduce carbon emission and “green” its operations. Cisco discovered the potential of the Network Academy through its philanthropic contributions of equipment to local schools — and the realization that no one at the schools knew how to maintain it.

In each case, companies found new opportunities by focusing in on the social dimensions of their business — not to meet external calls for social responsibility but to expand their markets, reduce their costs, and strengthen their competitive context. And in doing so, these companies created shared value — business initiatives that simultaneously benefit society and the businesses.

Most companies still view social and environmental impacts as externalities — issues that should have no effect on their core business. The wall between business and society is the most impenetrable one of all. And as a result, the vision of most CEOs has stopped at the boundaries of their company’s existing operations. Yet the greatest new business opportunities lie in the world’s unmet social and environmental needs. And many of the constraints that limit business growth — like the yields of cocoa farmers, the health care infrastructure in remote rural regions, or the number of trained network administrators in the world — turn out to be variables that businesses can control.

Creating shared value is about recognizing that business is an essential participant in solving social problems, and that overcoming social problems offers massive opportunities for business growth and profitability — especially during difficult times when and conventional business opportunities are scarce and social needs are most acute. All it takes is a CEO who can see through walls.

Mark R. Kramer, a cofounder and a managing director of the global social-impact consulting firm FSG, is a senior fellow at Harvard Kennedy School and a visiting lecturer at Harvard Business School. He is a coauthor, with Michael E. Porter, of “Creating Shared Value” (HBR, January–February 2011).